Mumbai: The Reserve Bank of India (RBI) on Thursday proposed opening the term money market to a wider range of financial institutions and companies in a move aimed at deepening market liquidity and improving monetary policy transmission across different maturities.
Under the draft directions released by the central bank, non-banking financial companies (NBFCs), housing finance companies (HFCs), All India Financial Institutions (AIFIs), and companies would be allowed to participate in the term money market, which is currently accessible only to banks and standalone primary dealers.
The RBI said the proposed framework is intended to strengthen the transmission of policy rates across various tenors and promote the development of a more active term money market. The central bank has invited comments from market participants and stakeholders on the draft guidelines until July 25.
At present, participation in the term money market is largely restricted to banks and standalone primary dealers, subject to prudential limits. The proposed changes would permit AIFIs and NBFCs, including HFCs but excluding base-layer NBFCs, to both borrow and lend in the market. Companies, meanwhile, would be allowed to participate as lenders.
Market participants believe the move could significantly expand the pool of borrowers and lenders in the unsecured money market, improving liquidity and price discovery in maturities beyond overnight borrowing.
The RBI has also proposed easing borrowing limits for standalone primary dealers. Under the draft norms, standalone primary dealers would be allowed to borrow up to 400 per cent of their net owned funds through term money and inter-corporate deposits taken together. Their borrowing limit in the call and notice money markets would continue to remain at 225 per cent of net owned funds on a fortnightly average basis.
For NBFCs and HFCs, the proposed borrowing limit in the term money market has been set at 200 per cent of net owned funds. AIFIs would be governed by board-approved limits within the existing regulatory exposure framework.
The draft guidelines state that participants will be free to negotiate interest rates, while transactions may be executed either over-the-counter or through authorised electronic trading platforms. The RBI has proposed extending market hours from the current 9 am to 5 pm to 9 am to 7 pm on business days, or as specified by the central bank from time to time.
(IANS)
